In the last post, I mentioned that money itself is a network. The more people that use the money, the more valuable it becomes. But what properties make some forms of money better than others?
The first property we’ll examine is the ease of exchange. Good money makes buying an apple just as easy as buying a house.
Let’s imagine you have a collection of gold nuggets. Since everyone likes gold, they’re willing to trade with you.
You find some land you’d like to buy. You and the landowner sit down and try to come up with a fair price but struggle to reach an agreement. Your gold nuggets vary in weight (quantity) and karat (quality).
The landowner now struggles to value your offer and compare it with others.
Throughout history, we solved this problem by making money uniform. By turning raw gold into gold coins of equal karat and size, we can simply exchange by agreeing to just the amount of money.
Economists refer to this as fungibility:
a property of a good or a commodity whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another part.Wikipedia
Throughout North American history, we’ve adopted a few forms of money. With each iteration, the money has become more fungible and easier to spend.
For example, in the 17th century when British colonists had settled the Americas, the colonists didn’t have money to trade amongst themselves.
They soon adopted Native American currency, wampum (hand-crafted beads from seashells), as legal tender in 1637. Wampum wasn’t perfectly uniform, so purchases required inspecting beads individually.
In 1661 the British sent uniform gold coins to the colonies. Being fungible, the colonists quickly adopted it as it was easier to trade. Although fungible, gold coins were too valuable for small transactions. Nobody would trade a gold coin for an apple.
To trade on smaller scales, Americans needed to carry other forms of money like silver or bronze.
By the end of the 18th century, the newly formed United States created a new currency, the US Dollar. The dollar had been backed by gold, which people valued, and allowed easy exchanges at any scale.
Today, the dollar can purchase small things, like an apple, to large things, like land, with the same ease.
Fungible money makes exchanges of any size easy.